Aug
13

Ryan on health care, Medicare, and fiscal responsibility

Mitt Romney’s naming of Wisconsin Rep Paul Ryan (R) as his running mate will place Ryan’s record under a microscope. That doesn’t mean most observers will understand, or realize the implications of what they see.
Before we take our turn at the viewing lens, a couple quick points.
1. I have NO problem with politicians advocating unpopular positions. They often cause the rest of us to rethink our positions and challenge commonly-held opinions.
2. I agree – absolutely – with the need to rein in entitlement spending.
3. I’m sure all of us abhor hypocrisy, particularly when it involves flip-flopping on political issues to gain votes.
Ryan has become the darling of conservative intellectuals for his “bold” budgetary proposals and willingness to “take on entitlement spending”, as well as his plan to slash taxes, particularly on investment income.
It’s one thing to advocate policy, come out with plans and proposals. To really understand a politician it is best to examine their record – so that’s what we’ll do.
We’ll start with the biggest expansion of entitlement spending since 1964 – Medicare Part D.
Eight years ago Ryan and the GOP passed the Medicare Part D drug benefit with no dedicated financing, no offsets and no revenue-generators. Three-quarters of the ultimate cost – which is now around nineteen trillion dollars – was simply added to the federal budget deficit.
The latest Medicare Actuaries’ report states the “estimated present value of Part D expenditures through the infinite horizon of $19.2 trillion, of which $9.1 trillion would occur during the first 75 years.” (see page 129)
I’d note that Ryan’s recent budget proposals and speeches are silent on Part D’s ultimate cost, funding, and impact on the deficit. At least I couldn’t find any references. The comments I could find touted the decline in projected costs – in fact, cost projections have come down over the last couple years – which is a good thing. However, unless they come down to zero – a long way from $19 trillion to be sure – the fact is Ryan voted for a huge expansion in entitlement spending and continues to stand behind that vote.
Squaring that position with Ryan’s current status as a budgetary hawk is going to be a bit of a challenge…
There’s just a little more. Ryan also voted against allowing the Feds to use their bargaining power to negotiate drug prices for Part D, a move that would have reduced costs by about $20 billion per year.
In a 2006 House analysis, a report “showed that under the new Medicare plan, prices for 10 commonly prescribed drugs were 80% higher than those negotiated by the Veterans Department [emphasis added], 60% above that paid by Canadian consumers and still 3% higher than volume pharmacies such as Costco and Drugstore.com.”
Another study indicated “An annual savings of over $20 billion could be realized if FSS [Federal Supply Schedule] prices could be achieved by the federal government for the majority of drugs used by seniors in 2003-2004…”
That’s defensible – perhaps – from a purely ideological position. It provides useful insight into Ryan’s priorities; when balancing his political ideology and, one might argue political expediency against an avowed commitment to budgetary discipline, the budget appears to lose.


Aug
9

So, what does the MSC deal mean?

While there have been a plethora of deals in the work comp services industry of late, the pending acquisition of MSC by OneCall Medical has surprised many. The rumored size of the transaction, the buyer, and the level of interest in MSC among investors and strategic buyers are causing folks to re-examine long-held views of the business as slow-moving, stodgy, and insular.
The success of MSC, who chose to sell its pharmacy management business several years ago to concentrate on durable medical equipment and home health care, has been remarkable. This was a bit of a contrarian play, as most services firms were looking to diversify, adding additional service lines in an effort to capture more revenue from their existing customer base. PBMs and other vendors added DME and HHC, diversified into PT, imaging, and other lines as they sought to be all things to their customers.
For most suppliers, this wasn’t terrible successful. The additional lines added some revenue, but the time, energy, and resources invested in the diversification effort took away from the focus on their core business. Moreover, it was hard for most suppliers to build much credibility or differentiate their offerings in these new service lines; their level of expertise and experience just weren’t that impressive.
In contrast, after spinning off their PBM to Express Scripts, MSC invested heavily in systems and sales staff, seeking to deeply penetrate its existing customer base and add as many new customers as possible. By all accounts it was quite successful, taking share from competitors through a coordinated effort targeting both home office buyers and individual adjusters and case managers.
MSC will be added to OneCall’s product portfolio, not as another product line but as the leading supplier in the DME and HHC sectors. Combining MSC’s transportation and translation business with that of OneCall consolidates their position as the leading T&T provider. Adding their leadership position in the small but rumored-to-be-highly profitable work comp dental space gives OneCall a rather interesting combination of products and services.
Equally, if not more important, is the combined companies’ sales and service footprint. While there will almost certainly be some reduction in the total number of staff, there’s no question OneCall will have more “feet on the street” than any other vendor in the business. The ability of OneCall to stay in front of adjusters and case managers, service national accounts, stay in touch with market trends and competitive dynamics, and measure and track what’s selling where and to whom for how much will be unparalleled.
Make no mistake, the MSC-OneCall deal is a watershed moment in the workers comp services industry. For decades this has been a cottage, mom-and-pop business, with most suppliers either small, local vendors or entities that grew up from those mom-and-pops. The industry will mature:
– Expect the pace of consolidation to continue, if not accelerate, as local suppliers – of all service types – fear their ability to compete with the big national suppliers decreases with each deal.
– New entrants will emerge, focusing on ever-more-tightly-defined niches, seeking to carve out and “own” a space where their expertise and capabilities are enough of an advantage to convince payers that adding one more vendor is worth the hassles.
– More investors – private equity funds in particular – are focusing on this space. They will likely drive up the price of deals (somewhat), although the tough credit markets will help keep multiples down.
What does this mean for you?
Opportunities to be sure, at the top end, and in newly-defined niches – for smart, creative, and, most importantly, disciplined entrepreneurs and managers.


Aug
7

Workers comp: heading over the “Fiscal Cliff”?

With Washington seemingly frozen in place, unable to agree on anything except it’s the other side’s fault, the awful specter of the Fiscal Cliff looks more and more possible. But unlike any other fall from a great height, we’re already getting hurt.
The “Fiscal Cliff” is shorthand for the automatic government spending cuts and tax increases that will go into effect January 1, 2013 – less than five months from today – if Congress fails to reach agreement on a plan to reduce the deficit. The CBO projects the cuts and tax increases will reduce the deficit by over a half-trillion dollars, but they will also cut four points from GDP and trigger another recession.
The CBO also projected that a failure to reach agreement early in 2012 would negatively affect the economy, leading households and businesses to cut spending and thereby reducing 20123 GDP by a half-point.
That projection appears to be prescient.
Manufacturers are already cutting back on orders. Some companies are holding off on hiring new workers. The hospitality industry is watching occupancy rates decline. Failure to address the Cliff will mean infrastructure construction and maintenance projects are in jeopardy
All this at a time when workers comp insurers are finally seeing some consistent premium rate increases, increases desperately needed to build up deficient reserves and cover rising medical expenses.
Employment drives workers comp, and employment in manufacturing and construction has a disproportionate effect. Although forecasts are still positive for hiring (particularly in non-residential construction), the closer we get to 12/31/12 the more dicey things will get.
What does this mean for you?
Watch what happens in DC; A resolution to the deficit crisis bodes well for work comp; no resolution would be bad news indeed.


Aug
6

Coventry’s Q2 work comp performance

The results for the second quarter are in, and Coventry’s doing well.
For now, we’ll focus on the work comp sector; if you are looking for any insights into Chariman Allen Wise’ views on comp, you won’t find them in his comments or the transcript of the earnings call. Both the Coventry folks and the analysts were entirely focused on preparations for reform, Medicaid, Part D, and expansion plans.
Despair not, as there’s enough other info out there that we can discern some trends with their work comp sector.
Fortunately Coventry has been reporting the work comp sector’s revenues on a separate line for a couple of quarters. The data indicates essentially flat sales with a slight dip this quarter (2.5 percent) compared to the same quarter in 2011. That’s a solid accomplishment, as its came despite the loss of significant PBM revenue with the move of ACE’s pharmacy business to rival Progressive Medical.
Pharmacy drives Coventry’s work comp top line. Coventry’s PBM, First Script, (and all PBMs) count pass-thru pharmacy transaction revenue as Coventry revenue. Contrast this to other service lines such as bill review and networks, where only Coventry’s portion of the spend hits their top line, and the importance of pharmacy to top line becomes evident.
Those other lines are under pressure as well. ACE reportedly is moving other business away from Coventry, including provider networks. Macro factors, such as the continued soft employment picture and fewer workers comp claims are also dragging down performance, reducing case management, bill review, and network business.
A factor that is getting almost no attention is the impact of physician dispensing on First Script’s revenue. With almost two-thirds of work comp pharmacy spend in Illinois and Florida and over a third of national spend from dispensing physicians , First Script’s top line is about a third lower than it would be if this practice was limited — as well it should be.
Best guess is Coventry’s work comp revenues would be about a hundred million dollars greater if not for dispensing docs.
To keep expenses down, management has been reducing staff; sources indicated several analysts from the reporting group were let go a few months back.


Jul
31

MSC – the deal is done

Sources indicate the deal for MSC is done; Odyssey is buying the big DME, home health and transportation/translation firm.
According to the official announcement, MSC has “entered into a definitive merger agreement” with imaging company OneCall Medical, (which in turn is affiliated with, STOPS, Express Dental to make up a work comp services firm that will rival long-time industry powerhouse Coventry in terms of sheer size. Terms won’t be published but the price will almost certainly be above $400 million.
With this acquisition Odyssey further positions its portfolio as a major player in the services industry; there are substantial synergies among and between the various services and product offerings that will make the combined entity a formidable competitor.
Current OCM CEO Don Duford will assume that title at the newly merged company, while MSC CEO Joe Delaney will be named President.


Jul
31

Is work comp going to get any better?

Rising medical severity. The worst combined ratio in a decade. Inadequate reserves. Stubbornly slack employment demand. Premiums down a full 23 percent over the last six years.
Things can’t get any worse, right?
Right?
Before we answer that, consider many asked the same question a year ago, and here we are. The most important single factor is employment – rising employment makes a lot of these issues way less significant. Employment drives premium dollars, which increases money available for additions to reserves. To say employment growth has been “disappointing” is to understate just how weak its been. Until employment growth increases significantly, comp writers are going to be running to catch up.
Specifically, they’re trying to increase premiums written to reverse the seemingly-intractable increase in the combined ratio. According to Fitch, the workers comp industry’s combined is at a ten year high at 117, a full 9.5 points above the average for the decade. There’s no doubt the 23 percent decline in premiums we’ve seen over the last five years was the big driver of the high combined.
There’s also no doubt rising medical severity coupled with reserve deficiencies are going to make improvements to the combined a “heavy lift”.
I’ll bang on this drum again – many payers have no idea what their opioid-addicted claimants are going to cost them. With opioids accounting for almost a quarter of all work comp drug spend, and the long-term usage of these drugs increasing everywhere (except California!), and few payers fully grasping the significance of this, the picture is ugly.
Being an optimist by nature, I’m hoping
a) employment picks up dramatically;
b) carriers don’t cross the stupid line when it comes to pricing;
c) insurers get a grasp on the cost of opioids and get serious;
d) regulators support that effort; and
e) employers start investing in safety, screening, and loss prevention.
Or at least two out of five.


Jul
30

Employers don’t buy. People do.

Buying decisions are often “illogical”, if you base the definition of “logic” on doing what appears best for the organization.
Those same decisions are quite logical, if you think about them from the perspective of the people making the decision. Unfortunately, few “sellers” understand that.
I’ve been dwelling on this for several weeks, as I’ve spent more than a few hours speaking with incredibly bright investment analysts about various potential investments in the managed care “space”. The conversations usually follow the same path…
Smart analyst (SA) – We’re trying to understand the value proposition of Company X…
Me – Well, Company X claims they save Y% on this or that type of medical service, which is more than their competitors.
SA – Wow, that’s a lot. How much of the market can they capture?
Me – Probably about xx%.
SA – Why not more?
Me – Well, their program requires the employer to make an investment in IT &/or training &/or change a business process &/or do things a bit differently.
SA – But in order to save all that money, that’s a no-brainer.
Me – You have to think about it in the context of the insurance market, which has been very soft for years, so there’s not a lot of capital available to invest in process or IT, staff to do the work, or hours to train staff who are processing claims.
SA – But in order to save all that money, that’s a no-brainer.
Me – Not necessarily; the person who has to make that decision has other priorities too, namely getting other critical IT projects that deal with compliance issues done, keeping claims moving to resolution, answering queries from her boss about progress on her boss’s boss’ pet project, and budgets are coming up too.
SA – But if Company X does the IT work, won’t that speed things along?
Me – Again, not necessarily; the vendor’s IT staff needs someone at the Customer – on the other end of the phone line – to work thru issues…
SA – So, let me get this straight. Company X can save an employer a gajillion dollars but employers won’t use them because some bureaucrat has other priorities?
Me – Yes, you got that straight.
SA – that makes no sense.
Me – [thought but not said] – not to you it doesn’t; to the “bureaucrat’ it makes all the sense in the world.
So what does this mean for you?
Employers don’t buy, people do. The ‘sale’ isn’t to an amorphous entity, it is to an individual or individuals, who succeed or fail in large part based on their decisions, the impact of those decision on other priorities, and whether their culture allows/accepts/rewards risk.
Don’t think about ‘business objectives’. Think about the person you’re talking to, who they are, what they do, and how you can make them successful while minimizing downside risk.


Jul
26

Provider consolidation – higher prices, better outcomes

Over the last few years, there’s been increasing consolidation among health care providers – hospitals buying physician practices, health care systems merging, hospitals ‘partnering with’ other hospitals. Overall, consolidation of providers has led to better health outcomes but had also increased prices.
That would be the sound bite, but like all sound bites it misses much of the context and nuance.
First, as noted above this consolidation takes many forms, and these different forms have different ‘results’. A study on provider market consolidation just released by the Robert Wood Johnson Foundation found:
increases in hospital market consolidation lead to increases in the price of hospital care. this is especially true when the consolidation occurs in already-concentrated markets where the price increase can be north of 20 percent.
– “Prices paid to hospitals by private health insurers within hospital markets vary dramatically”
– There is a “growing evidence base that competition leads to enhanced quality under administered prices.” This refers to studies of Britain’s National Health Service, which introduced competition among hospitals for patients as part of the 2006 reforms, as well as previous analyses of Medicare’s impact.
– There’s also evidence that competition improves quality where markets determines pricing, although that evidence isn’t as strong.
To date, there’s no clear evidence that physician-hospital integration improves quality. The pace of integration has increased dramatically over the last two years however this could lead to increased market power – and thus higher prices.
What does this mean for you?
We are in a very dynamic market. This is really unexplored territory, so payers would be very wise to carefully monitor pricing and quality measures in specific markets, paying close attention to those that already have high levels of provider concentration (e.g. Boston, Twin Cities)


Jul
25

Physician dispensing in comp – two small victories

Yesterday the Illinois Workers Comp Commission voted in favor of a regulation that would tie reimbursement of physician dispensed drugs to the price set by the original manufacturer. While this regulation has to pass thru a legislative committee before it can be implemented, that was good news indeed for Illinois’ work comp claimants, employers, and taxpayers.
The meeting was well-attended, and included representatives from the insurance industry, health care providers, PBMs (yours truly and others) and industry trade groups.
Noticeably absent were the drug chains, including Walgreens. I’m at a loss to understand this, as the WCRI report released last week showed 62% of pharmacy costs in IL are from physician-dispensed drugs. Those patients are NOT going to their corner pharmacy if they are getting their meds from their docs.
When patients get their medications from their doctors, they are at greater risk as the doc likely isn’t fully aware of the other medications the patient is taking, a risk that would be substantially reduced if they went to their pharmacy, where the pharmacist likely knows if there’s going to be a problem due to an interaction between the new drug and the patient’s current medications. Walgreens et al knows this is one of their big value propositions – the added safety inherent in going to your pharmacist.
From a purely financial point of view, the chain drug stores are missing out on thousands of store visits as well, where the claimant picks up their meds and likely some toiletries and perhaps milk too.
There are over 1900 pharmacies operating in Illinois; if one was at the meeting they didn’t announce themselves.
On a broader front, the Federal work comp program implemented an almost-identical requirement about a month ago in a move undoubtedly applauded by everyone who pays income tax to the Feds. No longer will physicians dispensing drugs to Federal workers be able to inflate costs by using repackaged medications costing several times more than the same drug bought at a retail pharmacy.
There’s bad news as well, but we’ll save that for another time.


Jul
23

The hardening WC market – another indicator

State funds’ share of the nation’s work comp premium dollar increased 7.1% last year, the first net gain in several years.
As state funds generally grow when commercial carriers’ underwriting gets tighter, this is yet another data point we’ve seen that indicates the work comp market is hardening
The report from AMBest (thanks WorkCompWire) specifically noted one of the reasons for state funds’ growth was a stronger pricing environment. Higher prices follow higher combined ratios: funds’ calendar year combined hit a very painful 134.9 in 2011.
This news comes on the heels of reports from agencies of firming pricing and indications that some larger employers are also expecting higher work comp premiums.
Anecdotally, several HSA consulting customers point to somewhat tougher underwriting decision making coming from home offices, higher rates, and more “selectivity” re new business.